American Greetings Case - The Best American Greetings Cases

1. What is going on at American Greetings? 

a) Discuss the competitiveness of the industry 

American Greetings is reviewing its performance and how it stands compared to other companies. The EBITDA of the company is estimated at 3.5 times multiple which is below the average of a comparable company whose EBITDA lies at 7.5 times multiple. The company is bound to come out as being competitive if it shifts to technology. The American greetings company also shows competitiveness when we compare the NET Debt/EBITDA ration of the company and that of a comparable company and we find a very minute difference between the two. This shows that the company has the capability of outdoing comparable companies in the market of the proper operating conditions and growth for the company is realized. 

b) Discuss the factors that drive the fundamental value of American Greetings 

There are several factors that determine the value of American Greetings value. One of the factors that drive the value for this company is the EBITDA as this determines the market cap for the company. If the company has a high EBITDA then this translates to a high market cap due to reduced operations in the company. The other factor that determines the value of the company is the shares price. IF the prices of the shares go up then this means that the EBITDA of the company will also improve and thus the enterprise value of the company will also go up and the opposite applies when the share price goes down. 

2. The shares of the American Greetings are currently trading at an EBITDA multiple that is at the bottom of its peer group. Do you think 3.5 times multiple is appropriate for American Greetings? If not, what multiple of EBITDA do you think is justified? What is the implied share price that corresponds to that multiple? 

EBITDA is used to determine the financial performance of any company. Therefore if the EBITDA of a company is high this translates to less operational expenses and thus the operations of the company will lead to more profits than losses. 

American Greetings Company is currently trading at EBITDA whose multiple is 3.5. This is lower compared to average comparable companies whose EBITDA is 7.5 times multiple. The reason behind the low EBITDA exhibited by the company is due to the 50% decrease in share prices. The company has plans to grow and shift into technology. The EBITDA that is therefore justifiable for the company is 5 times multiple EBITDA because I tend to feel that the company has been undervalued. 

Lowering of the share price affected the market cap and also ended up causing harm to the EBITDA of the company. The share price that corresponds to the 5times multiple enterprise value is a share price of $23. For American greetings to reach 7.5 times multiple they will be forced to increase the share price to $36 and also the company will be forced to cut down debts worth$1 billion. These scenarios are impossible and therefore the company should aim at achieving a multiple of 5times. 

3. Please model cash flows for American Greetings for the fiscal years 2012 through 2015. Using a marginal tax rate of 40% and a market risk premium of 5%, what is your estimate of the appropriate discount rate for the free cash flow forecast? Based on a discounted cash flow model, what is your best estimate of the implied enterprise value of the American greetings and the corresponding share price? 

In order to come up with a proper prediction for American Greetings, we had to come up with different market scenarios for the company. In the first scenario, we presumed the following for the company: the sales of the company would rise to 3%., the operating margin will be at 9%. Incorporating the cost of the value of the company an 8.49% discount rate was realized and we found the stock price to be $25.64 

In the case scenario below we expected the company to maintain a growth of 1.50% and the operating margin will be at 8.0%. The discount rate is the same as for the above case scenario but for this case, the shares price falls to $20.94 

In the third and final case scenario for the company, we assumed that the sales for the company will remain constant throughout the three years. The company in this scenario is expected to have 0% growth for the three years. The operating margin will vary and decrease as you move from 2012 to 2015. The discount rate for the company will still be at 8.49% and the share price that will be realized in this scenario is $13.04 which is way low compared to the other scenarios. 

4. What are the key drivers of value in your model? Do you recommend repurchasing shares? 

The key drivers that determined how we established our models are the cash flows, the cost of capital and finally the terminal value. These three drivers helped us to determine the present standing of the company using the three scenarios. The drivers also enabled us to calculate equity and share price for each of the three models that we came up with. The three drivers, therefore, gave us a directive on how the company would have performed in different economic conditions. 

After coming up with three different scenarios for American Greetings, we highly recommend the managers of the company to repurchase shares. As seen in the data above the stock price is expected to rise to about $ 25.64 if the company is optimistic. The repurchasing of the shares would, therefore, be a wise move for the company.